European stocks rose yesterday after three days of losses, although US and German bond yields near multi-year highs checked gains in world stock markets and kept them from testing recent record highs.
Stock markets in Europe rose 0.25 per cent, supported by a flurry of mostly positive earnings results, while Japan’s blue-chip stock index bounced 1.7 per cent off four-week lows and MSCI’s all-country equity index was marginally higher.
US equity futures however pointed to a flat open for Wall Street ahead of earnings announcements from tech giants Apple, Alphabet and Amazon.com.
January’s last trading session on Wall Street ended in the red, but US indexes still ended with monthly gains of over five per cent. World stocks enjoyed a record 15-month winning streak.
This week’s meeting of the US Federal Reserve was more hawkish than expected, but confirmed what markets had already expected – an interest rate rise is likely in March.
Global equity markets are torn between buoyant economic growth and double-digit company earnings, on the one hand, and the possibility that US and euro zone central banks will tighten policy faster than expected.
The growth momentum was confirmed by manufacturing activity surveys yesterday that showed Asian factories getting off to a strong 2018 start and Europe posting solid growth.
Equity bullishness is being put in check, however, by rising global bond yields. The Fed held interest rates unchanged on Wednesday but raised its inflation outlook, no longer saying it expected price growth to stay below two per cent. It also flagged “further gradual” rate increases.
That wording convinced many that rates could rise four times this year, rather than three.
US 10-year Treasury yields surged to near four-year highs above 2.75 per cent after the Fed statement, while German Bund yields yesterday rose to fresh two-year highs at around 0.74 per cent.
Pressure is building on euro zone authorities, too, to curb stimulus, with employment at record highs and yesterday’s manufacturing surveys confirming the bloc’s growth boom.
On currency markets, the dollar’s post-Fed bounce fizzled, pushing it down 0.1 per cent against a basket of currencies. The euro gained 0.2 per cent to $1.2440, just off recent three-year highs of $1.2538. The British pound rose 0.25 per cent, after a five per cent gain in January, its biggest monthly rise since May 2009, owing to broad dollar weakness and expectations of a Brexit deal more favourable to the UK.
Meanwhile, oil prices were higher after a survey showed Opec’s commitment to its supply cuts remains in place, even as US production topped 10 million barrels per day for the first time since 1970.